On January 2, 2005 Garr Company acquired machinery at a cost of $320,000. This machinery was being depreciated by the double-declining-balance method over an estimated useful life of eight years, with no residual value. At the beginning of 2007 it was decided to change to the straight-line method of depreciation. Ignoring income tax considerations, the retrospective effect of this accounting change is:__________.

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01-01-2021
Business

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On January 2, 2005 Garr Company acquired machinery at a cost of $320,000. This machinery was being depreciated by the double-declining-balance method over an estimated useful life of eight years, with no residual value. At the beginning of 2007 it was decided to change to the straight-line method of depreciation. Ignoring income tax considerations, the retrospective effect of this accounting change is:__________.

Sagot :

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Zvikoidn Zvikoidn · Answer 1 · 2021-01-02T19:43:07-05:00

Answer:

The depreciation charge will be lower in 2007 using straight line method compared to the one produced by double-declining-balance method

Explanation:

Double-declining-balance method

Depreciation Expense = 2 × SLDP × BVSLDP

Therefore,

SLDP = 100 ÷ number of useful life

= 100 ÷ 8

= 12.5 %

Calculation of Depreciation Expenses (DE)

2005

DE = 2 × 12.5 % × $320,000

= $80,000

2006

DE = 2 × 12.5 % × ($320,000 - $80,000)

= $60,000

2007

DE = 2 × 12.5% × ($320,000 - $80,000 - $60,000)

= $45,000

Using Straight line Method for 2007 Depreciation Expense

Accumulated Depreciation (2005 to 2006) = $80,000 + $60,000

= $ 140,000

Depreciable Amount = Cost - Accumulated Depreciation

= $320,000 - $140,000

= $180,000

DE = (Cost - Residual Value) ÷ Remaining Useful Life

= $180,000 ÷ 6

= $30,000

Conclusion :

Comparing 2007 Depreciation Expense using double-declining-balance method against straight-line method of depreciation we can see that straight-line method of depreciation produces lower results.

Sagot :

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